Debnam’s headline grab – ‘sell the lotteries’

December 11, 2006

So the state opposition leader really needs to get in the headlines – see this story :

Debnam govt would sell off lotteries – Yahoo!7 News

We are told that Debnam would consider selling a $381 million a year (2005/06) cash cow (the state lotteries) for $800 million to put towards the billion dollar drought proofing water fund.

That would be completely insane – instead we could sell $800 million in treasury bonds to raise the money and have those fully paid off by lotteries earnings in three years!

While I completely agree with the usage, selling the golden goose when the eggs would pay off a loan for the amount in three years is clearly a silly idea at best, negligent at worst.

Our state government is paying the princely rate of 5.5% interest on bonds at the moment, and has been doing so at least since July.

So – borrow $800 million for three years, paying the going rate of  5.5 percent interest each year, for a total payback of 800 + 44 + 44 + 44 = $932 million.

Let’s also reduce the lotteries earnings by 5% each year, to give us a worst case scenario (perhaps everyone in NSW develops a sudden fear of lottery tickets – can you imagine that?) Bear in mind 2005/06 was up 1.3% on 04/05, and that sales and profits have been steadily climbing since 2000.

So our pessimistic projected 2006/07 earnings are $361.95m, 2007/08 are $343.85m and 2008/09 $326.65 million. That’s pessimistic earnings of $1,032.45 million over three years.

By my calculations that still leaves the government up $100 million in the deal over those three years and still owning the lotteries!

What if interest rates rise? Well let’s up the bond rate by a full percent (which would be a very big deal and mean there would be no shortage of buyers…) This now means we’re paying out $52 million a year in interest payments, or an extra $24 million overall. Still leaving us $75 million in front.

Drought proofing doesn’t sound that expensive now, and we can dismiss this nonsense of selling cash cows when there are other options easily available.

Please chip in and tell me if my proposal has some weird hole that I cannot see
 – because if it was this simple I don’t see how anyone could ever think about the selling off the lotteries when the cashflow is so strong as to present much simpler options.